The news of a Carnival captain abandoning the ship Costa Concordia and leaving the women and children to fend for themselves left Wall Street real estate titans aghast and appalled. To be clear, they saw no foul in steering a big ship into the rocks. Nor were they vexed by the forsaking of passengers due to an unwise navigation into rocky waters. What the gilded barons of commercial real estate couldn’t fathom was the captain allegedly doing of all this and yet still failing to become bloated with a personal fortune.
What a bracing tonic for me to hear stock market strategist David Rosenberg talking about “SIRP – Safety and Income at Reasonable Prices.” Similarly, the doting mallards at Goldman Sachs are quacking “LOL DG - “Low Operating Leverage and Dividend Growth.”
As I have often touted, we are in a decade of low yields, anemic economic growth, and the occasional financial tsunami. The dominant strategy for commercial property investing in today’s choppy seas should be predictable dividend income and attractive entry pricing.
Smart private investments include assets that have: a) high cap rates; b) solid in place rents; c) tenants that are likely to renew, and d) highly defensible locations. Low cap rates cannot be rationalized for core-plus and value-add assets as betting on stable cap rates over the next five years is unduly risky.
Segment your asset projected cash flows and handsomely value in-place leases and whack pricing related to vacant space and, to a lesser extent, lease renewals. Project IRRs can be below historic expectations so long as you are expecting comparatively high dividend returns based on in-place tenants.
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